Making everyone happy is impossible. Pissing them off is a piece of cake. I like cake.

Friday, August 29, 2008

A professor of finance writes...

... via email, on the equality versus wealth debate. I reproduce the email here, with permission and with the top and tail removed.

Suppose we accept that, as a very rough rule of thumb, "the right" aims to increase wealth and "the left" wishes to increase equality.

We can look to see how both do against their objectives. If we look at the real average annual growth in the FTSE100 index, my Friday lunchtime back of the envelope calculations give +3.3% to Maggie, +8.4% to Major, +1.0% to Blair and -16.8% to Brown. In real terms, the market went up from 2.9 to 7.2 under Tory rule and has now declined back to 6.6 (although it remains higher in nominal terms).

This link between market returns and left vs. right wing governments has been found more formally by Leblang and Mukhergee, American Journal of Political Science, 2005, for both the US and UK. I quote them at boring detail...

"... we find distinct partisan patterns in the U.S. and British stock markets in that dividend yields and personal income from stock returns increases (decreases) in election years when the market expects the right-wing (left-wing) party to win elections and under right-wing (left-wing) administrations. This intriguing finding suggests that right-wing parties arguably have a greater ability and willingness for priming the economy in ways that has a positive impact on stock returns and income growth.

Conversely, our findings suggest that agents in the U.S. and British stock markets are genuinely concerned that the Democratic and Labor parties will remain committed to maximizing redistribution and welfare programs after elections by adopting policies that may lower stock prices. More generally, the presence of partisan patterns in the stock market indirectly support extant claims that partisanship has distinct effects on real economic outcomes since price movements in stock markets often reflect changes in macroeconomic outcomes such as personal income growth." [p.800]

So, now we get onto redistribution and welfare programmes. For data on this, you might want to look at this (AHH, just as I am about to hit the "sendbutton", I see Sunny has beaten me to it) [the Gini coefficient graph mentioned here] or, similarly, this [Powerpoint].

My reading of this is that income inequality went up pretty steeply under Maggie, as Sunny states, declined again under Major and has stayed largely steady since, with the most recent inequality movements being upwards.

So, the Conservatives increased marketable wealth at the expense of inequality, with the increasing inequality coming early in their term of office and the wealth coming later. Nu-Lab (or whatever) has decreased real marketable wealth with no change in equality and recently the movement of both indicators has been in the wrong direction.

DISCLAIMER: this email is written in a personal capacity in my lunchtime and not as a professional opinion. I haven't put enough research into it for that.

I don't think I have ever heard those on the left explain why they think financial equality is a good thing. If they think it will change desires and aspirations they must be in the land of the clouded cuckoos.

Alternatively, there's this paper:"Contrary to the widespread opinion that "Republicans are good for business," we find that the average excess returns in the stock market are higher under Democratic presidents."http://papers.ssrn.com/sol3/papers.cfm?abstract_id=244728

When the little ones jeered about Mrs Budgie's propensity for keeping candles I explained they would be needed next time Labour was in power. I did not realise that NuLab would make electricity unaffordable and "un-green" before they allow the EU to shut our power stations.

Now Alistair Darling - the only honest (?) NuLab politico (or maybe he knows he's about to be pushed by McBroon) - says we have the worst financial crisis for 60 years. So much for wealth, and equality, and fairness. And so much for socialist apologists - Darling has just pissed on their bonfire.

Great cross-reference from Chris to my original post. The paper he refers to got published in an excellent journal.

The arguments do, of course, go on. More recently still, Snowberg et al., 2007, Quarterly Journal of Economics, get a positive Republican effect. What do you expect from academics?

My main point was really about the UK. How do the Tories and Nu-Lab compare under both market wealth and inequality metrics? So, maybe Chris and I can compromise on SSRN paper ID 921258. This gets the clear Democrat positive effect for the US stock market that he refers to. However, there is also a similarly clear positive Tory effect for the UK stock market.